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Do Futures Benefit Farmers Who Adopt Them?

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  • Sergio H. Lence

Abstract

The present study shows how to use a simulation approach to quantify the effects of making a futures market available on adopting farmers’ behavior and welfare, and its impact on market variables such as spot prices. Relevant constraints often faced by commodity producers, such as credit restrictions or lack of markets for staple crops, are explicitly considered. Aggregate market effects associated with the adoption of futures by a group of producers are also incorporated. Under the chosen parameterizations, futures availability affects various aspects of adopters’ behavior. Futures availability renders consumers better off and non-adopting producers worse off. Farmers who adopt futures gain if their market share is small, but lose if their market share is large. However, the magnitudes of adopters’ gains or losses are quite small, especially when compared to the welfare effects resulting from alternative changes in the market environment faced by farmers, such as the relaxation of credit restrictions or the opening of a market for food crops. The impact of making futures available on the spot market is quite modest, regardless of whether the share of adopters is small or large.

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Bibliographic Info

Paper provided by Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA) in its series Working Papers with number 03-20.

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Length: 45 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:fao:wpaper:0320

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Related research

Keywords: Behaviour; Cash crops; Commodity markets; Demand; Farmers; Rational Expectations; Futures trading; Mathematical models; Supply; Trade policies;

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  1. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162.
  2. Richard E. Just & Quinn Weninger, 1999. "Are Crop Yields Normally Distributed?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 287-304.
  3. Geweke, John, 1988. "Antithetic acceleration of Monte Carlo integration in Bayesian inference," Journal of Econometrics, Elsevier, vol. 38(1-2), pages 73-89.
  4. Kawai, Masahiro, 1983. "Spot and Futures Prices of Nonsotrable Commodities under Rational Expectations," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 235-54, May.
  5. Roy Bailey and Marcus Chambers, . "A Theory of Commodity Price Fluctuations," Economics Discussion Papers 432, University of Essex, Department of Economics.
  6. Turnovsky, Stephen J & Campbell, Robert B, 1985. "The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 277-303, June.
  7. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-87, September.
  8. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
  9. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
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